Investors Take the Coke-Pepsi Taste Test for 2017 Return Prospects

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Now that 2016 has come to an end, it is important to look forward and backward to see what sort of opportunities exist for investors in the new year. The Dow Jones Industrial Average closed out 2016 at 19,762.60 on December 30, and while it missed the elusive 20,000 mark, it did end the year with a gain of 13.4% from the 17,425.03 close on the last trading day of 2015. Unfortunately for investors in Coca-Cola Co. (NYSE: KO), they did not really participate all that much in the broader market gains.

Again, it’s what is ahead that matters now. In an effort to see what Coca-Cola’s expectations are in a new year, it cannot at all be evaluated without the same consideration for PepsiCo Inc. (NYSE: PEP). After all, these companies dominate the beverage market in the United States and have massive global footprints with operations in more countries than can easily be imagined by most multinational corporations.

24/7 Wall St. evaluates each Dow component at the start of each year in an effort to derive its annual forecasts. While much of this takes shape in the final 60 days of the prior year and in the first few weeks the current year, we use the year-end consensus analyst price target for each company from Thomson Reuters. For an expected total return, we also give an inclusion for each company’s dividend yield based on a year-end snapshot of that yield. Most Dow stocks raise their dividends throughout the course of a year, but those are not part of the assumptions because they have yet to be seen.

Coca-Cola was just one of the two Dow stocks that had a negative total return in 2016. At −0.36%, its stock ended the year at $41.46 a share. The dividend made up for what would have been a 3.5% share price drop during the year. Coca-Cola actually was down about 6.5% in the second half, so it was not exactly showing that it was strong stock with high investor demand based on the Trump-effect going into 2017.

One thing that Coca-Cola investors do have going for them is a history of dividend hikes year after year. That yield of almost 3.4% and a consensus analyst price target of $45.54 offer an implied price gain of 9.8% and an expected total return of closer to 13% in 2017.

Coca-Cola has some negatives too, perhaps serious negatives. Foreign exchange has been hurt by a strong dollar. The company also struggles to get away from its sugar-water drink image, with efforts in sports and energy drinks and bottled water not making the image change fast enough. Many millennials just do not drink soda-pop, and even the trends of diet drinks with their bad chemicals are not enticing new drinkers enough to make a huge difference.

Another wild card for 2017 will be a management change. Muhtar Kent is stepping down as chief executive officer, and president, and Chief Operating Officer James Quincey already has been selected to replace him. One issue to consider is that the change is not effective until May 1, 2017, but Kent has led Coca-Cola since 2008, and Quincy’s tenure since 1996 did not come with a COO title until 2015. Kent was born in 1952, and his successor was listed as only 51 years old.

There is one more wild card out there, and that is that Coca-Cola has been mentioned as a possible takeover target for Anheuser-Busch InBev (NYSE: BUD). This would make a Warren Buffett “whale of a deal” sound small because Coca-Cola has a $180 billion market cap already. Would Kent be leaving if a deal was really brewing?

One positive move is that Coca-Cola has continued to get its operations aligned with existing markets with Anheuser-Busch. Could this have any impact on a would-be whale of a merger? Coca-Cola has a 52-week trading range of $39.88 to $47.13 and a market cap of $179 billion. Its dividend yield is 3.4%.